Weaker-than-expected Canada inflation disappoints markets, C$ falls

OTTAWA (Reuters) - Canada’s annual inflation rate strengthened by less than expected in March and February retail sales showed signs of weakness, disappointing markets and helping to push down the Canadian dollar.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Statistics Canada said on Friday the annual rate had edged up to 2.3 percent from 2.2 percent in February, the second straight month it exceeded the central bank’s 2.0 percent target.

Still, the rate was slightly less than the 2.4 percent forecast of analysts polled by Reuters.

The Bank of Canada has raised interest rates three times since July 2017 amid a strengthening economy and near record low unemployment, and markets largely expect a hike by this July.

“I think for both these reports today they’re just a wee bit short of expectations ... it sort of added to the underlying softness we’ve seen in the currency since about the middle of the week,” said Doug Porter, chief economist at BMO Capital Markets.

The Canadian dollar dipped to C$1.2712 to the U.S. dollar, or 78.67 U.S. cents, from C$1.2666, or 78.95 U.S. cents.

The main contributor to the higher annual inflation rate in March was a 17.1 percent jump in gasoline prices. Seven of the eight major components increased on a year-over-year basis.

The Bank of Canada’s three measures of core inflation were little changed. CPI common, which the central bank says is the best gauge of the economy’s underperformance, remained at 1.9 percent.

CPI median, which shows the median inflation rate across CPI components, stayed at 2.1 percent, while CPI trim, which excludes upside and downside outliers, edged down to 2.0 percent from 2.1 percent.

“It was little bit lighter than expectations ... to market expectations it was a little bit more dovish than expected,” said Derek Holt, head of capital markets at Scotiabank.

The Bank of Canada flagged that more interest rate hikes would be coming after it held its benchmark rates steady on Wednesday, but said it did not know when or how aggressive it would need to be to keep inflation in check. It cited progress on inflation and wages.

Retail sales grew by 0.4 percent in February as higher sales at auto dealerships and general merchandise stores outweighed widespread weakness in other sectors, Statistics Canada said.

Overall, sales grew in just four of the 11 subsectors, representing 47 percent of retail trade. In volume terms, sales edged up 0.3 percent.

With additional reporting by Fergal Smith and Allison Martel in Toronto; Editing by Bernadette Baum